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Monday, August 10, 2009

Cracks in the Pension Silver Lining

The rating agency DBRS released a pension analysis this month: Canadian Private Pension Plans – Losing or Cruising? As Canadian Financial DIY reported, the executive summary says that we’re closer to ‘cruising’ than ‘losing’ and that “the outlook for pension plan funding remains manageable.” We’re to believe that the silver lining for the recent bad news in pensions is that we’re going to be okay in the end. However, this summary appears to be a rosy view of the report details.

The detailed tables show the average private pension plan to be underfunded by 5.5%. This doesn’t sound too bad, but it lumps under- and over-funded pension plans together. However, Bank of Nova Scotia isn’t going to give its $1.1 billion pension surplus to Air Canada, BCE, Manulife, and Nortel which are collectively underfunded by $5.7 billion.

If we treat over-funded pension plans as simply full, then the average pension plan’s shortfall rises to 8.2%. Again, though, this understates the problem because people in problem pension plans can’t share the wealth in more solvent plans. One-quarter of plan participants are counting on a pension plan that is underfunded by between 15% and 43%.

More from the report: “Using the higher corporate-based discount rate, accounting valuations benefited from lower obligations, offsetting much of the impact from weak asset returns.” This is accounting speak for the losses due to the recent stock market drop haven’t been counted because we expect future returns to make up for the losses. If you don’t believe that future returns will fully make up for recent losses, then you’d have to think that the underfunding situation is worse than the reported numbers.

I don’t believe that the sky is falling. But I do think there is a big risk that many Canadians will get smaller pensions than they were promised. How much smaller remains to be seen.